Accounting for Uncertain Tax Positions

The Financial Accounting Standards Board (FASB) issued an Exposure Draft on Accounting to Uncertain Tax Positions on Thursday, July 14, 2005. The Exposure Draft would apply to all tax positions accounted for in accordance with FASB Statement No. 109, “Accounting for Income Taxes” and seeks to reduce the diversity in practice associated with the recognition and measurement in accounting for income taxes.

The Exposure Draft specifically requires that a tax position meet a “probable recognition threshold” for the benefit of the uncertain tax position to be recognized in the financial statements. The threshold assumes tax authorities will examine the uncertain tax position.

“While, generally, the validity of a tax position is a matter of law, in some cases that law is subject to significant and varied interpretations resulting in diverse and inconsistent practices relating to the financial statement recognition of the benefits of uncertain tax positions,” states FASB Board Member Edward W. Trott. “Today’s proposed Interpretation would increase comparability of financial statements by enabling all uncertain tax positions to be evaluated using consistent criteria.”

The Exposure Draft, which has a 60-day comment period, contains guidance in respect to the measurement of the benefit that is recognized for uncertain tax position, when that benefit should be derecognized, and other matters.

The FASB invites public comment on Exposure Drafts. Comments can be submitted electronically to director@fasb.org.

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